European austerity FAIL

"Rarely has policymaking been this poor," says Jeff Madrick in How Austerity Is Killing EuropeNYR Blog 01/06/2012. The policy in question is Angie-nomics, the insistence on austerity policies during a depression on which German Chancellor Angela Merkel has so far successfully insisted. "This is disaster," he writes. And he's right to use the present tense.

We are seeing in real time the effects of austerity economics, and the experience applies to the United States as well as Europe:

Indeed, austerity economics has not worked in one single case in Europe in the last two years. When David Cameron’s government imposed a first round of harsh spending cuts in 2010, it utterly failed to revive the British economy as promised. To the contrary, it probably cut a budding recovery short. Unemployment and the deficit as a percent of GDP remained high. Some pro-Conservative observers I met at the time assured me that the Cameron team, led by George Osborne, the Chancellor of the Exchequer, was pragmatic and would reverse course on austerity if it wasn’t working. Yet when growth basically ground to a halt in late 2011, the Cameron team only doubled down, making further cuts. We need more of the same medicine, they told their citizens, a record number of whom are unemployed. Britian [sic] is a hair’s breadth away from outright recession only two years after its last one.

In November, meanwhile, Spaniards voted out of office a once-popular Socialist government, in part for its failed austerity program of the past year. The Socialists had earlier presided over a boom and even built a budget surplus. But then the housing and banking crises struck and private Spanish banks ran amok. In response, in 2010 the Socialists sharply reversed an earlier stimulus policy, cut spending, and raised taxes to the tune of about 5 percent of GDP. Government debt is still not high in Spain, and interest rates have not risen the way they have in Italy. But economic growth stalled after these measures were implemented, because reduced public spending weakened the demand for goods and services, pure and simple. With Spain’s official unemployment rate now 21.5 percent, the Socialists lost the election badly—paradoxically pushing voters to elect a conservative leadership that is calling for more austerity. In Spain, recession is now inevitable. [my emphasis]

There are certainly true believers in the doctrines justifying austerity economics. Angela Merkel probably is. But one-percenters also see austerity policies as a way to weaken unions, undermine social supports for working families, lower wages, roll back pensions and gain more leeway from necessary but annoying regulations.

But, you may have heard, austerity worked in Ireland! Well, no:

The recent experience of this once booming country should be deeply embarrassing to those who advocate austerity economics. For six months early last year, its national income started growing again after a couple of years of dramatic collapse following its own financial crisis. Ireland guaranteed all the debt of its over-aggressive failing banks to appease investors and then paid for it by cutting social spending sharply. Ireland’s leaders said with almost religious authority that this painful self-discipline was necessary to right the economy, and officials in Ireland and across Europe hailed the country’s brief rebound in 2011 as proof that it works. But then the Irish economy plunged in the third quarter of 2011 at its fastest rate ever. The upturn in the economy proved only temporary under the restraints of austerity economics. It may yet need another bailout.

Madrick cites the measures that could save the euro - we probably should say now, could have saved the euro - but that will not be adopted: making the eurozone into a true fiscal and transfer union; having the European Central Bank act as buyer of last resort for eurozone sovereign debt; and, creation of Eurobonds based on the credit of the entire eurozone but available to use for any country.

The December EU summit was probably the last chance to make a push for such measures in a timely enough manner to bail out the situation. The drama isn't over until it's over. But it's hard to see this plot playing out to a happy ending for the euro and the European Union.